Y&G Corporation Bhd (KLSE:Y&G) Could Easily Take On More Debt

Some say volatility, rather than debt, is the best way to think about risk as an investor, but Warren Buffett famously said that 'Volatility is far from synonymous with risk.' When we think about how risky a company is, we always like to look at its use of debt, since debt overload can lead to ruin. Importantly, Y&G Corporation Bhd. (KLSE:Y&G) does carry debt. But the more important question is: how much risk is that debt creating?

When Is Debt Dangerous?

Debt and other liabilities become risky for a business when it cannot easily fulfill those obligations, either with free cash flow or by raising capital at an attractive price. If things get really bad, the lenders can take control of the business. While that is not too common, we often do see indebted companies permanently diluting shareholders because lenders force them to raise capital at a distressed price. Of course, plenty of companies use debt to fund growth, without any negative consequences. The first step when considering a company's debt levels is to consider its cash and debt together.

Check out our latest analysis for Y&G Corporation Bhd

What Is Y&G Corporation Bhd's Debt?

You can click the graphic below for the historical numbers, but it shows that as of March 2022 Y&G Corporation Bhd had RM41.9m of debt, an increase on RM39.9m, over one year. But on the other hand it also has RM57.9m in cash, leading to a RM16.0m net cash position.

How Strong Is Y&G Corporation Bhd's Balance Sheet?

According to the last reported balance sheet, Y&G Corporation Bhd had liabilities of RM38.5m due within 12 months, and liabilities of RM40.9m due beyond 12 months. Offsetting these obligations, it had cash of RM57.9m as well as receivables valued at RM60.0m due within 12 months. So it actually has RM38.5m more liquid assets than total liabilities.

It's good to see that Y&G Corporation Bhd has plenty of liquidity on its balance sheet, suggesting conservative management of liabilities. Due to its strong net asset position, it is not likely to face issues with its lenders. Succinctly put, Y&G Corporation Bhd boasts net cash, so it's fair to say it does not have a heavy debt load!

Even more impressive was the fact that Y&G Corporation Bhd grew its EBIT by 165% over twelve months. If maintained that growth will make the debt even more manageable in the years ahead. When analysing debt levels, the balance sheet is the obvious place to start. But it is Y&G Corporation Bhd's earnings that will influence how the balance sheet holds up in the future. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.

Finally, while the tax-man may adore accounting profits, lenders only accept cold hard cash. While Y&G Corporation Bhd has net cash on its balance sheet, it's still worth taking a look at its ability to convert earnings before interest and tax (EBIT) to free cash flow, to help us understand how quickly it is building (or eroding) that cash balance. Over the last three years, Y&G Corporation Bhd actually produced more free cash flow than EBIT. That sort of strong cash generation warms our hearts like a puppy in a bumblebee suit.

Summing up

While we empathize with investors who find debt concerning, you should keep in mind that Y&G Corporation Bhd has net cash of RM16.0m, as well as more liquid assets than liabilities. The cherry on top was that in converted 250% of that EBIT to free cash flow, bringing in RM23m. When it comes to Y&G Corporation Bhd's debt, we sufficiently relaxed that our mind turns to the jacuzzi. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately, every company can contain risks that exist outside of the balance sheet. For instance, we've identified 3 warning signs for Y&G Corporation Bhd (1 is potentially serious) you should be aware of.

If you're interested in investing in businesses that can grow profits without the burden of debt, then check out this free list of growing businesses that have net cash on the balance sheet.

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This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.